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Summary
Reports from Twelfth District contacts indicate that the economy expanded soundly in late November and December, representing a slight improvement from the previous survey period. Consumer and producer prices generally were stable, although respondents noted increases in some energy and material costs. Wage and salary increases remained modest, with the growth rate of total compensation edging up. District retailers reported robust holiday spending by consumers, with higher sales and less discounting relative to last year. Manufacturing activity in the District continued to expand, representing a pickup in the pace of growth in several sectors. District housing markets remained strong and commercial real estate markets showed further signs of improvement. With the exception of cattle ranchers--who were affected by the discovery of mad cow disease in Washington state--conditions among District agricultural producers remained solid. Reports from District banking contacts indicated that demand for commercial and industrial loans remained subdued, though demand for small-business loans improved slightly.
Prices and Wages
District contacts generally noted little change in prices in the recent survey period. Exceptions to this pattern were for natural gas, homebuilding materials, and certain manufacturing inputs such as steel plate. Contacts said that stiff competition among domestic businesses continued to constrain pricing power.
Despite a pickup in hiring, wage and salary pressures in the District remained modest in recent weeks. However, contacts noted that, as job markets have improved, companies have found it more difficult to shift increases in healthcare premiums, workers compensation insurance premiums, and other employee-related costs to workers. As a result, the growth rate of total employee compensation has edged up for many employers.
Retail Trade and Services
District contacts indicated that sales of retail merchandise were brisk in late November and December, with both dollar sales and unit sales up considerably relative to last year. In general, retail contacts reported limited holiday season discounting, especially for electronics, jewelry, and high-end apparel. Discounting was prevalent among low- to moderate-priced apparel sellers. Most contacts reported that holiday sales met expectations, leaving retail inventories in balance heading into 2004. Automobile dealers reported some improvement in sales in December, boosted by renewed financing incentives and year-end discounts on remaining 2003 models. In California, the reversal of the October increase in the vehicle license fee reportedly contributed to a pickup in sales; this allowed most District auto-dealers to run down inventories that were accumulated in October and November.
Business conditions for District service providers continued to improve, with several noting firmer demand. Advertising and marketing firms reported a rise in contracts for print and radio advertising campaigns. Demand also strengthened for accounting and legal firms, stimulated by interest in corporate pension planning and tax preparation services. Contacts at West Coast ports indicated that improved export traffic and holiday season importing kept several District seaports operating at capacity in December. Demand for preventative and outpatient healthcare services continued to grow in the District. Conditions in the District travel and tourism sector remained strong; several contacts noted a surge in travel associated with unusually good conditions in prominent ski areas.
Manufacturing
District manufacturing activity increased further in late November and December, with the pace of growth accelerating in many sectors. Makers of machine tools, building materials, furniture, and construction equipment noted that growth of sales and orders for their goods accelerated in recent weeks. One District machine tool maker said that the recent demand surge nearly filled company order books for 2004. Orders for and sales of semiconductors and other high-tech products continued to grow, boosting capacity utilization at several plants. A weaker dollar helped District apparel makers expand output, but most continued to operate below full capacity. Improved demand for manufactured goods reportedly surprised some raw material and equipment suppliers; several manufacturers noted that they were having difficulty obtaining inputs in a timely fashion. Although most manufacturers in the District remained cautious about expanding payrolls, a few contacts noted that they have begun to hire highly-skilled workers.
Agriculture and Resource-related Industries
With the exception of cattle ranchers--who were affected by the discovery of mad cow disease in Washington state--conditions among District agricultural producers remained solid. Contacts reported strong seasonal sales of cut flowers and Christmas trees over the holiday season. Prices for most other agricultural goods reportedly were stable and inventories generally remained in balance. Export bans on beef and beef products associated with the discovery of a case of mad cow left several traditional cattle ranchers and feed lots in the District with excess inventories. The mad cow scare has benefited some organic beef ranchers; sales of range-raised beef reportedly rose considerably in recent weeks.
Real Estate and Construction
District residential real estate markets remained robust during the most recent survey period. Sales of new and existing homes increased throughout the District and home-price appreciation remained solid. Conditions on the commercial side improved slightly, with office vacancies and lease rates stabilizing in most markets. Several commercial landlords noted that businesses have begun to take advantage of the low-lease rate environment to obtain more desirable locations or more desirable office space. In San Francisco, for example, businesses have begun to move from surrounding suburbs to the city of San Francisco. Contacts in other areas of the District report tenants moving from Class B to Class A office buildings.
Financial Institutions
District banking contacts indicated that commercial and industrial lending remained subdued in late November and December. However, demand for small-business loans reportedly improved slightly in some areas, and contacts noted increased inquiries about rates and loan terms. Mortgage lending remained healthy but down from the prior survey period and from the same period a year ago.
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Dallas